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Saturday, April 18, 2009

David Altig, senior vice president and research director at the Atlanta Fed, argues (hat tip, Mark Thoma) that a piece written in Economix on Tuesday (NY Times economics blog) is not, as David calls it, "that tight". Specifically, the sole purpose of the article was to highlight that the sustained retrenchment in consumer spending is a "historical oddity". And as David argues, it is not an oddity at all.

I agree with David: this Economix piece has its flaws and is definitely outdated (see last paragraph). In contrast, I don't agree with David's measure of cumulative PCE loss, which understates the impact of the shocks to consumer spending in the current cycle. Each indicator has its own cycle within the overall economic cycle; and the best measure of cumulative PCE loss is using the peak to trough ofPCE, rather than the economic peak (the NBER dated peak, which David uses) to the PCE trough.

The chart illustrates the cumulative PCE loss using monthly data, as measured by the economic peak to PCE trough (blue) and by the peak and trough of PCE itself (red) over the last eight cycles (including this one). Normally, the different measures present almost identical results. With the exception of the current cycle, the biggest difference occurred in the 73-75 recession, a -0.2% differential.

However, this time it matters by a -0.6% differential. The cumulative PCE loss using the peak to trough PCE measure is -2.5% compared to that using the economic peak to PCE trough measure, -1.9%. PCE was rising through May 2008, five months after the peak of economic activity as defined by the NBER.

The PCE peak to trough paints a darker picture; one that puts this cycle on par with one of the bigger recessions, 1973-1975 (Note: I disagree with David's calculation of the 73-75 PCE loss; it appears to be too little).

One last thing: the Economix article is behind the times, even in the comment that the "sustained" consumer spending decline is an oddity. Consumers are proving to be much more resilient than previously expected. Currently, this PCE cycle is unlikely to set any records, not even that of the first time that PCE contracted for three consecutive quarters since 1947. By my estimates, March real PCE (to be released on April 30) needs to fall by more than $74.6 billion in order to post a third consecutive quarterly decline; that is unlikely.